Accounting standards require that the cost and net realizable value (NRV) of each inventory item should be calculated individually and the lower figure taken in each case. This is to ensure to account for losses on all individual items or groups of items.
Example – Calculation of Total Value of Inventory:
Ian Shore has recently valued his end of year inventory at $17200.
The following three items have not been included in his inventory valuation:
Shore did not include the above items in his inventory valuation as he was uncertain which value to use for each.
Calculate the total value of Ian Shore’s inventory.
This example not only illustrates separate valuation concept but also explains to us that replacement cost is not an acceptable method irrespective of its higher or lower value. So in view of this each item of inventory should be valued separately at lower of cost or net realizable value.
Formula to Calculate Cost of Work in Process (WIP):
Work in process should be valued at prime cost plus a proportion of factory overheads. However selling, distribution, administration and financial expenses are not included in its valuation.
WIP = Prime Cost + Factory Overheads